PANAY ELECTRIC CO., INC., Petitioner, v.

THE COLLECTOR OF INTERNAL REVENUE and THE

COURT OF TAX APPEALS, Respondents.
[G.R. No. L-10574. May 28, 1958.]

FACTS:

Petitioner is a grantee of a legislative franchise under Act No. 2983, as amended by Act No. 3665, to
install, operate, and maintain an electric light, heat and power system in certain municipalities of
Iloilo, for a period of fifty years from the approval of its franchise on January 22, 1921. Under the
franchise, it was required to pay a franchise tax equal to 1 1/2 per cent of its gross earnings, during
the first twenty years, and 2 per cent during the remaining thirty years.

Upon the promulgation of Republic Act No. 39, amending Section 259 of the National Internal Revenue
Code, respondent Collector of Internal Revenue required petitioner to pay a franchise tax of 5 per cent
instead of 2 per cent of its gross earnings. In view of the insistence of respondent in his demand,
petitioner paid the franchise tax of 5 per cent (beginning January 19, 1947 and up to January 18,
1952) at the same time protesting the imposition and collection of the 5 per cent tax. The protest,
however, was denied by respondent.

Meanwhile, (on March 25, 1952) the Supreme Court promulgated, its decision in the case of Philippine
Railway v. Collector of Internal Revenue , wherein it was held that the rate of tax provided in Section
259 of the Revenue Code as amended by Republic Act No. 39, is not applicable to holders of
franchises which fix a specific rate of franchise tax.

On the basis of this decision, petitioner on April 16, 1952, wrote a letter to the City Treasurer of Iloilo
City, demanding the refund of excess franchise taxes paid since October 1, 1946.

In the meantime, respondent Collector accepted the ruling laid down in the case of Philippine Railway
v. Collector of Internal Revenue, supra, and thereafter, collected from petitioner franchise taxes at the
rate of only 2 per cent.

The last payment made by petitioner at the rate of 5 per cent was on January 18, 1952.

On July 22, 1952, respondent Collector wrote to petitioner, informing it of his stand on the question of
refund, to the effect that the first claim for refund filed by it was made only in its letter of April 16,
1952, and that refund may be effected only of the overpayment made two years prior to said demand,
that is to say, from April 16, 1950.

Petitioner on August 20, 1952, filed a petition for review with the defunct Board of Tax Appeals,
seeking the refund in the amount of P135,872.67.

RESPONDENT

In his answer, respondent admitted that there had been overpayment, but contended that it could
allow a refund of overpayment made for a period of only two years prior to April 16, 1952, when
petitioner filed a formal demand for refund.

Respondent accordingly agreed to credit petitioner only with the amount of the overpayment from
April 19, 1950 to January 18, 1952. Library
The Board of Tax Appeals rendered its decision reversing that of respondent Collector and ordering
him to refund to petitioner not only the amount (P64,607.07) as overpayment for the period 1950-51,
but also the amount ( P70,272.49) covering the period of 1947- 50.

However, upon motion for reconsideration by respondent, the Board of Tax Appeals modified its
decision in the sense that the refund to petitioner should only corresponds to the period of two years
prior to the filing of the letter of demand for refund (dated April 18, 1952).

Petitioner appealed the decision as modified to the Supreme Court and Board of Tax Appeal, but
dismissed the appeal without prejudice.

Thereafter, petitioner filed the corresponding complaint against respondent in the Court of First
Instance of Iloilo for the refund of the whole amount ( P135,872.67).

Upon the creation of the Court of Tax Appeals (under Republic Act No. 1125) the case was sent up to
said court for final disposition.

The Tax Court (CTA) decided on March 10, 1956 that "only the excess payments made by plaintiffs
from October 18, 1950 to January 18, 1952 (in the aggregate amount of P50,516.95) were made
within two years prior to the institution of judicial proceedings for recovery thereof.

The excess payments made prior to October 18, 1950 (from January 19, 1947 to July 18, 1950 in the
amount of P85,355.72) cannot be recovered, the right of action of plaintiff in regard thereto having
prescribed."

Consequently respondent was ordered to refund to petitioner only the sum of P50,516.95.

Hence, the appeal.

ISSUES:

1. Whether or not petitioner is entitled to a tax refund.

2. When refund may be allowed?

3. Whether or not Franchise Tax is an Internal Revenue Tax.

RULING:

The appealed decision is affirmed.

1st Issue:

Yes. Petitioner is entitled to a tax refund.

Legally speaking, the decision of the Tax Court is therefore correct, being in accordance with law.
However, the SC held that one’s conscience does not and cannot rest easy on this strict application of
the law, considering the special circumstances that surround this case. Because of the Tax Collector’s
erroneous interpretation of the law on franchise taxes, the Collector, from the year 1947, had illegally
collected from petitioner the respectable sum of P135,872.65. From a moral standpoint, the
Government would be enriching itself of this amount at the expense of the taxpayer.

Under a strict interpretation and application of law, petitioner is entitled to a refund of this
overpayment or illegal collection for a period of only two years prior to the date of the suit or
proceedings before the Board of Tax Appeals on August 20, 1952, that is to say, all payments and
illegal collections from August 20, 1950 (which amount to P50,516.95 as found and adjudged by the
Court of Tax Appeals).

Though the Supreme Court do not advocate the refund of the entire overpayment of P135,872.67, but
on moral and equitable grounds, the SC believe that the petitioner is entitled to the refund of
P64,607.07, basing on the two year period, beginning from the day the claim for refund was made on
April 18, 1952.

The SC modified the decision of the Tax Court so as to increase the amount of the refund from
P50,516.95 to P64,607.07 for reasons fairness and equity.

2nd Issue:

On moral and equitable grounds, petitioner is entitled to refund from the date of the claim for refund.

"SEC. 306. Recovery of tax erroneously or illegally collected. — No suit or proceeding shall be
maintained in any court for the recovery of any national internal revenue tax hereafter alleged to have
been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected
without authority, or of any sum alleged to have been excessive or in any manner wrongfully
collected, until a claim for refund or credit has been duly filed with the Collector of Internal Revenue;
but such suit or proceeding may be maintained, whether or not such tax, penalty, or sum has been
paid under protest or duress. In any case, no such suit or proceeding shall be begun after the
expiration of two years from the date of payment of the tax or penalty." cral aw virtua1aw l ibra ry

Furthermore…

Under Section 309 of the Tax Code, the Collector of Internal Revenue is authorized to credit or refund
taxes erroneously or illegally received, for a period of two years from the date of the claim for refund.

(In the case at bar, the Collector not only offered to credit but took steps to credit petitioner with
overpayment for a period of two years from the date of the claim for refund. In so doing, he waived
the prescriptive period of two years from the date of the actual filing of the suit.)

("The authority of the Collector of Internal Revenue to credit or refund taxes or penalties under this
section can only be exercised if the claim for credit or refund is made in writing and filed with him
within two years after the payment of the tax or penalty.”)

3rd Issue:

Yes, franchise tax is an internal revenue tax.

The SC is satisfied that the franchise tax is an internal revenue tax within the meaning of the Tax
Code, and agreed with the Court of Tax Appeals on its view and ruling on this point (holding that a
franchise tax is an internal revenue tax, and consequently, refund of any overpayment is governed by
Section 306 of the Tax Code).library

And as correctly maintained by the respondent, Section 18 of the Tax Code enumerates what are
National Internal Revenue Taxes, and among others franchise taxes are clearly listed. Section 18 of
the Revenue Code, as pointed out by the former Board of Tax Appeals, clearly classifies franchise
taxes as national internal revenue taxes.

Also Section 259, Tax on Corporate Franchises, deals with franchise taxes.

"It is clear from a reading of Section 259 of the Revenue Code that the ‘franchise tax’ provided therein
refers not only to the tax imposed in said section but also to the ‘taxes, charges, and percentages’
prescribed in the special charters under which holders of franchises operate. In fact, the collection of
franchise taxes and the penalty for delinquency are governed by Section 259, in so far as the
provisions thereof are not inconsistent with the special charters.

Thus the SC has doubt in mind that the franchise taxes prescribed in Act No. 2983, as amended by
Act No. 3665, under which plaintiff operates, is a national internal revenue tax, and the provisions of
law governing refunds of national internal revenue taxes are applicable to refunds of the franchise tax
here in question."cralaw virtua1aw library

PRINCIPLES:

1. TAXATION; FRANCHISE TAX, NATURE OF; REFUND OF OVERPAYMENT; REQUISITES

BEFORE SUIT COULD BE MAINTAINED. — franchise tax is an internal revenue tax, and
consequently, refund of any overpayment is governed by Section 306 of the Tax Code, to wit: That
before a suit could be maintained in any court for the recovery of any tax said to have been
erroneously or illegally assessed or collected, a written claim for refund of said overpayment or illegal
collection should first be made, and the action to enforce said refund should be instituted within two
years from the date of payment.

2. REFUND, COUNTED FROM DATE OF COURT ACTION. — A claim for refund not followed by a
judicial action avails the claimant nothing. Besides, the refund of any tax already paid or illegally
collected is limited to a period of two years, counted from the date of the suit in court, not from the
date of the claim for refund. The claim for refund is only a preliminary step to court action.

3.REFUND FROM DATE OF CLAIM, WHEN MAY BE ALLOWED; CASE AT BAR. — In the case at
bar, however, because of his erroneous interpretation of the law on franchise taxes, the Collector had
illegally collected franchise taxes from petitioner. While petitioner was to blame in part for supposedly
sleeping on its right and in not filing the claim for refund and the suit to enforce said refund on time,
there is evidence to the effect that if petitioner did not file its suit for refund earlier, it was because of
an agreement with an agent of the Collector that they should await the result of the case of Philippine
Railway v. Collector of Internal Revenue, then pending in this Court in order that the parties may act
correctly. On moral and equitable grounds, therefore, petitioner is entitled to refund from the date of
the claim for refund. Moreover, under Section 309 of the Tax Code, the Collector of Internal Revenue
is authorized to credit or refund taxes erroneously or illegally received, for a period of two years from
the date of the claim for refund. In the case at bar, the Collector not only offered to credit but took
steps to credit petitioner with overpayment for a period of two years from the date of the claim for
refund. In so doing, he waived the prescriptive period of two years from the date of the actual filing of
the suit.
NB.

1. There is also some evidence to the effect that if petitioner did not file its suit for refund earlier than August
20, 1952, it was because of an agreement or understanding with the agent of the Collector that they
should await the result of the then pending case in this Court of Philippine Railway v. Collector of Internal
Revenue, in order that the parties may act correctly and in accordance with the law, as interpreted by the
SC.

2. Petitioner draws a distinction between tax proper and franchise tax.

‘A tax is a forced charge, imposition or contribution; it operates in invitum, and is in no way dependent
upon the will or contractual assent, express or implied, of the person taxed. (51 Am. Jur. pp. 38-39.)

‘Franchise tax is "in consideration of the granting of the franchise," and it operates because a person
taxed assents expressly or impliedly. It is, in one word, a contractual assent. As correctly maintained by
the respondent, Section 18 of the Tax Code enumerates what are National Internal Revenue Taxes, and
among others franchise taxes are clearly listed; Section 259, Tax on Corporate Franchises, deals with
franchise taxes.’ (B.T.A. No. 85, October 18, 1952.)